US Equities P/E Ratios higher than SG Equities: A Bad Sign?

From the data, it is pretty clear intuitively that the Singapore markets have an edge over US markets with high dividend yields + lower P/E ratios (trailing PE I suppose, not forward). But intuitively, we know that the US markets are obviously more attractive than what we have locally.

The fallacies of everything P/E ratio

The reason is because the P/E ratio is imperfect, even though it has been touted by analysts and often gets thrown around more often than a blunt at a Snoop Dogg concert.

A quick lowdown on the P/E ratio. The trailing P/E ratio is a proxy for how expensive a company is – how many years of earnings will a company be required to produce to arrive at the given share price. Generally, between 2 companies in a similar industry, with similar margins and earnings, a lower P/E ratio means that a company is cheaper and therefore a better value investment (value investing).

On the flipside, companies like Amazon have P/E ratios over 100 which sound ludicrous. But it exposes the inherent flaws of the P/E ratio – it tells investors nothing about the bottom line (earnings) growth of the company. A company like Amazon has a high P/E ratio fundamentally because it is deemed a growth stock and investors expect earnings to grow exponentially moving forward, be it through improving margins through economies of scale or revenue growth. Therefore the P/E ratio is effectively not too heavy of a consideration when a growth investor enters a position in Amazon.

Lower P/E Ratios in SG = Good?

Bringing this back to the local context, SG has lower P/E ratios and relatively high dividend yields because of the way our market is structured. The SG stock market is generally quite a shitty place to raise equity capital because our volume and liquidity are relatively low. Companies would much rather list in HSI (HK) than in SG because they can raise massive equity capital during their IPO, for example. Consequently, major SG companies in the STI are generally financial services companies like DBS, UOB and OCBC, along with REITS and some low growth companies. All of these companies have low top line growth and consequently possess low P/E ratios. In order to compensate investors appropriately for their investment in their company and knowing that their upside from capital appreciation is limited, they raise dividend yield to reward investors for taking on risk in investing.

Always remember that for companies providing high dividend yields, there is a good chance that they are doing so because they aren’t confident of providing similar returns in of capital appreciation, therefore they raise dividend yield to reward investors for taking on risk in investing.

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